When a company repurchases its shares, it reduces its share count, which increases its earnings per share. That should make remaining shares more valuable. But not all buybacks are equally beneficial. Investors should look for several signs.

First, make sure the share count is moving in the right direction—down. Last quarter, 317 companies in the Standard & Poor's 500 index repurchased shares, but only 98 of these reduced their share counts, according to S&P. Many companies use repurchases merely to offset shares that are issued to employees as compensation. Net buybacks—repurchases that whittle down a company's sharecount—are what matters.

During the 1980s, companies that announced buybacks went on to beat the market by 12 percentage points over the following four years.
Stuart Goldenberg for Barron's

Second, ignore net buybacks that look like short-term financial fixes. Studies show that companies often turn to buybacks when manager pay is linked to earnings per share, and when companies would otherwise miss Wall Street's earnings-per-share targets by a penny or two. Just 36 companies in the S&P 500 shrank their share counts by 1% or more last quarter.

Third, look for companies that are buying at attractive prices. Many don't, and
Dell
(DELL) offers a case study in what can go wrong. It spent more than $27 billion on repurchases in its past 10 fiscal years, more than its current stock-market value. Its shares during that period slid from more than $40 apiece to under $10, perking up to their current level of $14 and change only in the past few months amid a takeover effort by founder Michael Dell (see Cover Story). Dell frittered away corporate cash buying shares at an average price of $25.

Dell's not alone. S&P 500 companies spent a record $172 billion on stock during the third quarter of 2007, just before the stock market headed south. How could companies get the timing so perfectly wrong? One reason is that they tend to increase spending on shares when earnings are booming and their shares are making new highs. The good news is that companies don't seem to be chasing share prices during the current rally. Buyback spending fell 1.5% last year to $399 billion.

More than two decades ago, Josef Lakonishok, then a professor at the University of Illinois, and now chief executive of LSV Asset Management in Chicago, demonstrated the importance of valuation to buybacks. During the 1980s, companies that announced buybacks went on to beat the market by 12 percentage points over the following four years. But the cheap ones, based on the ratio of share prices to the book value of company assets, beat the market by 45 percentage points; the pricey ones didn't beat it at all.

All four of the companies below have repurchased meaningful amounts of their stock over both the past quarter and year, look attractively priced relative to earnings, and have good dividends.

WellPoint is the country's largest health insurer by enrollment. New health-plan exchanges for small groups as part of Obamacare are likely to increase enrollment, but also crimp margins on some existing business. The company says that may cost it $400 million over five years. That seems a manageable sum; WellPoint could return $2 billion to shareholders this year, $1.5 billion in repurchases and the rest in dividends, according to JPMorgan. Shares seem priced for the worst at eight times this year's earnings forecast, with 4% growth in earnings per share expected next year. They yield 2.3%.

Seagate makes computer hard drives. The rise of tablets and smartphones, which use smaller, faster flash drives, hasn't come close to making high-capacity mechanical drives obsolete. Demand for them is soaring at the vast data farms that support the cloud. Seagate is pushing into hybrid drives, which offer the benefits of flash with much larger storage capacity. Shares go for seven times earnings and yield 4.2%. Last fiscal year the company returned 85% of its operating cash flow to stockholders.

Western Union shares are up 15% since Barron's recommended them in this space late last year ("The New Safe Stocks," Dec. 17, 2012). They still look attractive. The money-transfer company has had to cut prices in some markets in response to new competition. Earnings per share are expected to decline to $1.42 this year from $1.74 last year before rebounding to $1.59 next year. Shares go for just 11 times this year's forecast and carry a 3.3% dividend. The February IPO of tiny
XOOMxoom 0.2824858757062147%Xoom Corp.U.S.: NasdaqUSD24.85
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(XOOM), which saw the online money-transfer company's shares jump 59% on their first day, illustrates the business' attractiveness to would-be competitors. But its worldwide network of payment centers would be difficult to reproduce.

AT&T has a giant dividend yield of 4.9%, which makes it all the more remarkable that it has lately spent more on repurchases than dividends. As the investment needs of the company's U-verse fiber-optic network abate in coming years, even a modest increase in data usage and revenue should support strong cash returns to stockholders. Shares sell for 15 times earnings.

Shareholder-Friendly

These four companies have good dividends, and they're spending plenty of cash on share repurchases.